Bread and butter issue: Rising prices may herald the first global food shortage since the 1970s

When the United Nations held its annual World Food Day last week to publicise the plight of the 854m malnourished people around the world, its warning that there “are still too many hungry people” was a little more anxious than usual.

Finding food to feed the hungry is becoming an increasingly difficult task as growing demand for staples such as wheat, corn and rice brings higher prices. That is leading all nations – rich and poor – to compete for food supplies.

Food security is not a new concern for countries that have battled political instability, droughts or wars. But for the first time since the early 1970s, when there were global food shortages, it is starting to concern more stable nations as well. “The whole global picture is flagging up signals that we’re moving out of a period of abundant food supply into a period in which food is going to be in much shorter supply,” says Henry Fell, chairman of Britain’s Commercial Farmers Group.

As agricultural commodities trade at record high levels, causing one food manufacturer after another to put up prices – Danone, the French dairy group, this month became the latest to reflect the severity of the cost increases when it said it would increase prices by 10 per cent – countries are starting to question whether they can afford to keep feeding themselves.

Wheat and milk prices have surged to all-time highs while those for corn and soyabeans stand at well above their 1990s averages. Rice and coffee have jumped to 10-year records and meat prices have risen recently by up to 50 per cent in some countries.

“The world is gradually losing the buffer that it used to have to protect against big swings [in the market],” says Abdolreza Abbassian, secretary of the grains trading group at the UN’s Food and Agriculture Organisation. “There is a sense of panic.”

Per capita income and food weighting in CPI

Some of the price rises are the result of temporary problems, such as drought in Australia, and diseases, such as blue-ear in Chinese pigs. But there is a more permanent increase in demand from Asia, as richer populations in China and India demand more protein, and from the biofuel industry, which is on course to consume about 30 per cent of the US corn crop in 2010 – developments that will underpin prices for the medium term.

The FAO estimates that those structural new trends will help to push the cost of agricultural commodities in the next decade between 20 and 50 per cent above their last 10-year average.

This is a problem for economies where food represents a significant share of their imports payments. The International Monetary Fund says higher food prices are hurting poorer nations in Africa, such as Benin and Niger, as well as a number of countries in Asia, from Bangladesh to China itself, and parts of the Middle East.

The difficulties are compounded because the importance of food in overall consumer spending is negatively correlated with income levels (see chart). For example, food is more than 60 per cent of the “consumption basket” measured by economists in sub-Saharan Africa, whereas it is 30 per cent in China and only 10 per cent in the US, according to the IMF.

For countries that export grains and other commodities, such as the US, Australia or Canada but also Argentina and Namibia, high prices are lucrative at a macroeconomic level and for the businesses and farmers involved. But there, too, consumers suffer. In Italy, which imports around half its durum wheat needs, people took to the streets this summer to protest at higher pasta, bread and milk prices.

Grain exporting countries have consequently started restricting the amount of grain they export, postponing sales or imposing in some cases prohibitive export tariffs to keep their local market well supplied, avoiding politically damaging food price increases.

In Russia, which faces parliamentary elections in December and where President Vladimir Putin has said he was “worried about price growth, especially food prices growth”, the government has introduced export duties on wheat and barley and is discussing further tariff increases. Russian food retailers, under pressure from the Kremlin, have meanwhile agreed to freeze prices on some basic foodstuffs to help cool down inflation.

Neighbouring Ukraine is considering export quotas on corn, barley and wheat.

Food price inflation

At the same time, food importing countries have started to look for ways to increase their domestic production or build emergency stocks as a buffer against sharp price increases or shortages. For example, Pakistan plans to import more wheat than it does normally to make sure it has enough to feed its population. India has also bought more than necessary in order to build up its stocks.

The European Union has suspended its “set-aside” rules that bar farmers from planting cereals on 10 per cent of their land. The rules were designed to avoid overproduction but Brussels is now worried that there will not be enough cereals to meet demand. In the US, however, the Department of Agriculture has decided against allowing land to be released early from the Conservation Reserve Program that, similarly to the EU’s set-aside, pays farmers not to plant on some of their arable land.

Analysts and traders say farmers are likely in the 2008 crop season to plant more wheat at the expense of cotton and, to a lesser extent, corn, barley and soyabeans. This means that, while wheat prices may fall next year, crops such as cotton and corn might jump in value because of the reduced supplies.

State finances are also being imperilled, as countries that import much of their food have started to increase subsidies paid to food producers to compensate for higher costs and scrapped import tariffs. Akhter Ahmed, a subsidies expert at the International Food Policy Research Institute, a Washington-based think-tank, says international agricultural prices are directly linked to the cost of food importing countries’ subsidies. “The recent price increase is going to be a drain for government budgets,” he warns.

The FAO has forecast that the lower-income “food-deficit” countries will next year spend more than $28bn (£14bn, €20bn) on importing cereals, double what they spent in 2002. “The combination of higher export prices and soaring freight rates is pushing up domestic prices of bread and other basic food in importing developing countries, which has caused social unrest in parts,” the organisation said in its latest Crop Prospects and Food Situation report.

Egypt, which experienced the “Bread Intifada” riots in 1977 when the government raised bread prices, last month said it was increasing the subsidies it pays to bread producers in the light of ongoing increases in global wheat prices.

Certainly, there is currently little chance of subsidies being lowered by many developing countries. Abah Ofon of Standard Chartered Bank says that for countries such as Morocco, where a large proportion of the population lives close to or below the poverty line, wheat is a staple part of people’s diet and therefore “eradicating subsidies is tantamount to political suicide at this stage”.

In China, the government is providing larger subsidies to farmers to increase agricultural production, particularly of pork and milk after the country suffered a price spike this year. Beijing also plans to increase subsidies to low-income urban residents and student cafeterias while it has cut soyabean import duties in order to keep prices down.

Commodity analysts in part blame the US and Europe for the current price increases. They say the heavy subsidies placed on agricultural produce by the American and European governments in recent decades have made investment in agriculture unprofitable for many other countries because they have found it hard to compete.

Jeffrey Currie, head of commodities research at Goldman Sachs, says the relatively low investment in agriculture outside the US and Europe is coming back to haunt European and US consumers in the form of higher food prices as global supplies of agricultural produce fall behind demand.

The world’s leading agricultural exporters are the EU (led by France, the Netherlands, Germany and the UK) and the US, followed by Brazil, Canada and Australia.

“The US and Europe were exporting agricultural deflation; now they’re exporting agricultural inflation,” Mr Currie says.

The IMF adds that western countries’ biofuel policies are also behind the current problem. “One country’s policy to promote biofuels while protecting its farmers could increase another, likely poorer, country’s import bills for food and pose additional risks to inflation or growth,” says the institution in its latest World Economic Outlook.

This impact would be mitigated if the US and the EU reduced barriers to biofuel imports from developing countries, such as Brazil, where production is cheaper, more efficient and environmentally less damaging, the IMF adds.

In the near future, demand for agricultural raw materials is likely to continue rising in world markets as countries that have previously been able to meet their own food needs start importing more, increasing the global challenge of feeding populations. Don Mitchell, an economist at the World Bank, says: “Although China and India are relatively self-sufficient in food, some economists doubt that this can continue as incomes rise and [think] that they will need to rely much more on imports.”

The FAO expects India to import more wheat and China to increase imports of coarse grains to supply feed to its livestock industry. Both countries are also expected to increase imports of oils that are used in food production, such as palm oil. The World Bank estimates that cereal production will have to rise by nearly 50 per cent and meat output by 85 per cent between 2000 and 2030 to meet projected global demand.

Developed countries are not immune. In the UK, the Department for Environment, Food and Rural Affairs acknowledged in a December paper that food security was becoming a “matter of concern”.

Kate Bailey of Chatham House, the London think-tank, says Britain’s food supply is facing “huge change” due to shifts in global trade patterns. Policymakers may have to return to thinking about food as a “strategic asset”, she adds – even in a nation that has not been self-sufficient in food since the Industrial Revolution.

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